Market Update: Investors bullish about real estate in 2014

Investors expect to increase their allocations to real estate from 9.5 per cent to 10.3 per cent of their overall portfolios, according to the latest INREV Investment Intentions Survey.

The report estimates that the 142 institutional investors participating in the study expect to invest almost EUR35bn into real estate globally this year. Growth is being driven by strong demand from investors in the Asia Pacific region. Over half of those surveyed (53.8 per cent) are expecting to increase their allocations over the next two years.

European investors also have an optimistic outlook on the market, with 48.9 per cent of respondents saying they expect to increase their allocations. There is more caution amongst North American investors as only 26.9 per cent plan to do the same while the majority (61.5 per cent) do not expect allocations to change.

More stable economic conditions and a weak correlation with bond and equity markets mean that real estate remains a popular choice for investors looking to diversify their portfolios. This was borne out in the survey findings, with diversification benefits cited by investors and fund of funds managers as the top reason to invest in real estate, scoring an average importance rating of 4.2 (out of five), up from 3.9 last year. For Europe, the survey results suggest that interest in joint ventures and club deals, which remains high, may now have passed its peak. Over a third (36.6 per cent) of respondents expect to increase their allocations to these products, which is more than ten percentage points lower than a year ago. Debt will be a popular investment target over the next two years.

Overall, 25.2 per cent of investors expect to increase their allocations to real estate and mortgage debt, with large investors in particular looking to increase their exposure to debt markets. And fund managers of all sizes continue to launch real estate debt products. “These results show a stabilisation of confidence amongst investors with increased allocations to real estate, which is good news for the sector,” says Casper Hesp, INREV’s director of research and market information. “There are also signs of a potential change in emphasis with investors searching for the optimum way to structure their portfolios to achieve the ideal investment mix.” Article reprinted from Property Funds World. February 2014

Finance Trends: Multifamily sector on solid footing

Players in the capital markets agree that the multifamily sector seems to be on solid footing, with even better years ahead. But there are always undercurrents to be aware of. What major trends are mortgage bankers watching? One major current in multifamily financing is the pullback in Fannie Mae and Freddie Mac financing, says Hugh Frater, CEO of Berkadia.

Rather than being a development of little consequence, that trend could have some important implications for borrowers. It could, for one, portend greater general uncertainty in both capital availability and financing execution. As the Fannie and Freddie footprint continues to be reduced by the regulators, CMBS and banks will be playing a much bigger role in multifamily financing, says Frater. “What will have to happen is that a lot more of the financing will have to go to CMBS,” he adds.

The loss of Fannie and Freddie financing could theoretically be adequately compensated for by CMBS and bank capital, even though, as Frater notes, maturing multifamily loans will more than double in the next three years. To place the shrinkage in Fannie Mae and Freddie Mac’s footprint in perspective, Frater compares today’s level of agency financing to historical averages. He says that the agencies’ financing represented 85 percent of the multifamily marketplace in the past six years. However, in the nine years prior to that time, “if you go back to 2000, the GSEs never represented more than 47 percent of market share.”

Their average market share was 30 percent, he notes. Frater agrees, however, that in order for CMBS financing to adequately step up to the plate, CMBS issuers will have to extend their financings to smaller loans and to secondary and tertiary markets, which is already starting to happen. It will not be difficult for conduit lenders to ramp up the financing volume to the required amount if they add additional human capital, notes Frater, though in order for them to do so, they will have to be confident about the future business climate. So what does a reduced Fannie/Freddie footprint mean for borrowers? “At minimum—uncertainty,” says Frater. Financing from the banks and from CMBS lenders can dry up more quickly than GSE financings.

Bank financings are subject to regulatory and legislative pressures which can cause banks to retreat, says Frater. And CMBS financing is dependent on the capital markets which have been shown in the past few years to be vulnerable to overnight crises. By contrast, the most reliable source of financing has been shown to be the agencies, he suggests. Execution terms may also be subject to greater fluctuations in a new world of financing that is dominated by CMBS. And there is also the perception that there may be more execution risks under CMBS, compared to Fannie Mae and Freddie, financing, adds Frater.

The good news, though, is that conduits are prepared to advance more proceeds. There are two other factors to watch out for in the world of multifamily financing, says Frater. One is the level of apartment supply. Generally, the most construction is taking place in markets with the strongest the employment growth—in markets such as Texas and the Northwest, says Frater. However, some lenders are already seeing cause for worry in some markets. For example, much new development has been seen in Florida, says Frater. On the other hand, there is still plenty of demand, and excess supply at this stage is just “something to keep an eye on,” says Frater. Story reprinted from MultifamilyHousingNews. February 2014